>MPHASIS: Direct Channel and HP Channel (Q1FY12 Results - Key Highlights)

■ Mphasis posted a topline growth of 4.1% to ` 13.67 bn from ` 13.13 bn on sequential basis and an increase of 10.8% from ` 12.33 bn on YoY basis on account of the rupee depreciation of 7.3%. In dollar terms, revenue declined by ~3%. Strong Direct Channel (DC) growth (14.4% QoQ) helped them to change the composition (HP:DC) significantly to 58:42 in Q112 vs 62:38 in Q411. On industry basis, the strong growth was led by insurance (7.4%) & Information Technology, Communication & Entertainment (ITCE 8.3%) and Banking & Capital Market (BCM 4.5%). On service wise, Infrastructure management services (IMS) grew by 8.7%, owing to strong demand seen in DC side of IMS. On geographical mix, Asia Pacific and Japan (APJ) increased by 15.6% on QoQ basis.


■ EBITDA improved by 7.4% to `2.52 bn from `2.35 bn on QoQ basis. Notably, the margin bunked the declined trend with an improvement of 57 bps to 18.5% from 17.9%.


■ PAT remained flat with a slight positive bias of 1.1% to `1.85 bn from ` 1.83 bn (QoQ).

■ Direct Channel and HP Channel: Direct Channel continued its strong momentum by growing 14.4% on QoQ, taking the current revenue proposition to 42% vs 38% in Q4FY11 and 32% in Q1FY11. In particular, DC’s emerging market jumped by 27.2% and DC’s mature market increased by 11.2% on QoQ basis. During the quarter, Mphasis added 28 new clients, in that 17 clients in DC and rest 11 in HP Channel. Since Q1FY11 (strategic changes), Mphasis added 128 clients, in that 82 clients in DC channel and rest 46 clients in HP Channel. HP remained sluggish (-4% growth in $ terms QoQ) due to HP annual shutdown and certain project related impact. The management trimmed its Non-ES guidance to $75-80 mn vs $100 mn for FY12E.


■ Operating Metrics – In application business, Mphasis gained 5% in offshore pricing on QoQ ($21 vs $20), on account of optimal deployment of resources leading to efficient project execution Whereas they lost 3% in onsite pricing to $67 vs $69 in Q411 on account of current fluctuation adjustments. Even though, the management attributed no pricing discussions with HP in this quarter, but hinted that if anything, it would be inline with industry standard. On headcount basis, Mphasis has witnessed a decline for the third consecutive quarter to 38798 in Q112 vs 41739 in Q211. We believe there is little room for further margin improvement on utilisation front (ITO: 81% in Q112 vs 73% in Q211; App: 77% in Q112). However, management is quite confident of maintaining the EBITDA margin in the 18-21% range.


Outlook & Valuation: The management’s strategy of transforming the company into more direct business-oriented has started to show positive results, which is a good sign for Mphasis from medium to long-term perspective. We trimmed our earnings modestly by 1.5% and 3% for FY12E and FY13E to factor in the slightly below results. On the back of the attractive valuation during Q411, sizeable cash on the BS, market expectations of buyback & improving DC sentiments made the stock rally ~35% in YTD. However, overhang on HP business and increasing risk of price cuts from HP would keep the upside capped. Currently, Mphasis trades at a consolidated P/E of 10.9x and 9.2x on its FY12E and FY13E earnings of `37.2 and `43.9 respectively. We think that it might take couple of quarters of stable performance to restore investor’s confidence in the management and growth prospects. We continue to value Mphasis at 9x on its FY13E to arrive at a price target of Rs.395.2 and maintain our Neutral rating.


RISH TRADER